WASHINGTON, November 21, 2017 – For the past several weeks, we’ve been in the uncomfortable position of seeing our portfolio value decline even as the markets tend to melt-up. The problem: We’re trying to hold on to positions we believe in longer term. But, we suspect, we’re being hit by tax-loss selling and profit-taking. Both have tended to be late-December phenomena, particularly that tax-loss selling.
But this year, the gang is dumping stocks way ahead of schedule. We are seeing loads of “order imbalances” on the selling side each and every day of the week lately, always 15 minutes before the market’s closing bell. There’s a lot of dumping going on, but nobody – in the financial press anyway – seems to be paying it much heed.
Trading Diary: Some things are worse than tax-loss selling
Weighing on our portfolio like an old-fashioned millstone, our overly large position in Allergan’s cumulative preferred “A” shares (AGN/PRA) is a big part of our current portfolio malaise.
But our fairly good-sized position in Apple (AAPL) hasn’t helped either. Every time that stock gets a fire lit under its lumbering share price, some rumor-mongering idiot in the financial press posts some kind of fake news that the Kids from Cupertino are doomed. High-frequency, high-speed trading algorithms and machines shift into high gear, and down we go.
Monday trade this week was gloomy, and AGN/PRA got hammered again. So did the underlying common stock of Allergan (AGN). Both seem to be establishing a firm trading range bottom, AGN/PRA somewhere around $600-610 per share, and AGN somewhere around $160-170 per share, all because of the never-ending flap over the patents on the company’s hit dry-eye treatment, Restasis, which a Federal judge wiped away with his judicial magic wand earlier this fall.
Once the company gets past this mess, and after competitors appear some time in 2018, apparently, AGN should start to trade on fundamentals again as the company puts the current mess behind it. The preferred – and its holders like us – may not be so lucky. AGN/PRA is mandatorily convertible on March 1, 2018. If we’re still holding at that time, we’ll inherit x amount of those common shares, which pay a lot skinnier dividend per share than the preferreds.
That said, the silver lining here is (we think) the dual conversion ratio that will come into play on March 1, as determined by a moderately complex formula. Here’s the way it works, according to the invaluable common and preferred stock breakdown site Quantum Online:
“The conversion settlement rate will be 2.8345 shares per unit if the then current market price is equal to or greater than $352.80 and 3.4722 shares per unit if the market price is equal to or less than $288.00. For market prices between those values the settlement rate will be $1,000 divided by the market value.”
The bad news here is that at current prices, the common stock we’ll get will, technically, amount to a loss on our original purchase of the preferred shares. A pretty big one at that. But if we play Warren Buffett and just hold and hold, we’ll likely come out ahead in the end once Allergan’s common stock gets past its current bloodletting and resumes trading on normal values, likely sometime in 2019.
We hate it when we’re essentially forced to let a position go dormant like this one, particularly given the size of the position. But, as you can easily see, there’s that silver lining we talked about a bit earlier in the conversion transaction.
Prior to the Restasis disaster, AGN/PRA and AGN had both been heading for the stratosphere, and it was a realistic possibility that on March 1, 2018, AGN would trade significantly above $288 per share, meaning we’d get a chumpy 2.8345 conversion rate with regard to the number of common shares we’d get in the process.
But now, unless a miracle occurs and Restasis suddenly gets its patent protection back until 2024 (as the company and its investors originally thought would happen), there’s no way Allergan’s common shares will be anywhere near $288 per share. That means, it’s a virtual certainty, barring an Act of God (like we just experienced with the Restasis thunderbolt), that our preferred shares will convert at the infinitely better 3.4722 rate, resulting in a significantly larger holding of those shares once AGN/PRA converts.
Of course, more rottenness could happen to the mother ship between now and then. But we’re looking at the fundamental strength of Allergan from roughly Q3 2018 and beyond, and it looks pretty good. Which means we should finally be back in the green again, circa sometime in 2019.
We hate it when this happens, but it happens.
On the other hand, Apple shares seem to be resisting the current bear raids, and the stock has been up for most of Tuesday’s trading action.
Additional positions we hold are generally doing pretty nicely as well. It’s just that all the positives are currently being obscured by the long-term Allergan disaster and (until today) the short term Apple hammering.
In general, though, we should be expecting the kind of yo-yo action we’re getting in current markets. Not only has the profit-taking and tax-loss selling gotten underway early this year. We have oil and headline risks to plague us, and, worst of all, we have this week and the week between Christmas and New Year’s to torment us as well.
Both these major holiday-interrupted trading weeks generally see stocks getting badly crunched as the sellers keep selling and shorting while everyone else is off enjoying the holidays with extended family somewhere. That means the trading bias during these two periods tends to be negative in our experience.
Hopefully, after we get Black Friday out of the way this week, stocks will overcome their current profit-taking, tax-loss selling binge, finally igniting the usual (but not always), annual Santa Claus rally, leading to a profitable year-end close. One caveat, though. This early tax-loss selling binge can always return with a vengeance for the season finale, taking all the joy out of those “holiday parties” everyone suffers through at the office.
Passing something like the current GOP tax bills in their final form would certainly help the situation. But if the GOP (aka, the Stupid Party) blunders again and fails to follow through on this long-promised legislation, we predict right here and now that stocks will proceed straight to hell, killing the Santa Claus rally and the perma-bulls with one stroke as swift and deadline as a guillotine drop.
We, ourselves, however, would prefer to see Santa in a much jollier mood, with presents for all intrepid investors. But we’ll wait and see. Otherwise, don’t expect too much in the way of columns for the remainder of this week. Trading this week, as always before Thanksgiving, will be so low-volume and listless that even 200-point gains and losses on the Dow – lacking volume and thus conviction – won’t really give us a market tell at all.
*Article illustration via FreePik.